Reserve Bank of India Governor Sanjay Malhotra on Wednesday said the introduction of a small merchant discount rate (MDR) on certain Unified Payments Interface (UPI) transactions is unlikely to have a major impact on transaction volumes. Speaking to reporters at the central bank headquarters, Malhotra said there had been no visible decline in UPI volumes so far and indicated that he did not expect a modest fee to significantly alter consumer or merchant behaviour. “As of now, we do not see any drop in volumes. And I don't personally think that a small fee will have a major impact on the volumes,” he said. His comments come after the government recently permitted the charging of MDR on certain UPI transactions, marking a change in the cost structure surrounding high-value digital payments.

Under the new framework cited in the report, UPI transactions above ₹2,000 will attract an MDR of 0.4 per cent. MDR is a fee associated with processing digital payments and is generally linked to the cost of accepting payments through electronic channels. The introduction of a charge on eligible UPI transactions has attracted attention because the platform has expanded rapidly as one of India's most widely used digital payment systems. Concerns have been raised over whether additional transaction costs could affect payment behaviour, particularly among merchants and businesses that rely heavily on UPI. Malhotra's comments suggest that the RBI is not currently seeing evidence of a significant reduction in transaction volumes following the policy change.

The Governor's remarks came hours after the RBI announced a rate hike and indicated that a reduction in interest rates was not currently on the table. The monetary policy decision adds another dimension to the central bank's assessment of economic activity, with borrowing costs and financial conditions remaining important factors for businesses and consumers. Malhotra said bank credit growth was expected to remain strong going forward and would continue to support broader economic activity. Strong credit expansion can help businesses finance investment and working-capital requirements while also supporting consumption and other areas of economic activity. The RBI's assessment therefore points to continued lending momentum even as monetary policy remains focused on managing prevailing economic conditions.

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Malhotra also addressed concerns surrounding the financial health of non-bank lenders amid high levels of liquidity in the financial system. He said the RBI remained conscious of the possibility that an abundance of liquidity could have an adverse impact on asset quality at non-bank financial companies. Asset quality refers broadly to the health of loans and other credit exposures held by financial institutions, with deterioration potentially leading to higher defaults and increased financial stress. While the central bank is monitoring the situation, Malhotra made it clear that the RBI does not currently expect the adverse scenario to materialise. His comments indicate that regulators remain alert to potential risks even as they do not foresee a significant deterioration in the quality of assets at non-bank lenders.

The combination of UPI developments, strong bank credit growth and the RBI's assessment of non-bank lenders comes as the central bank continues to balance economic activity with financial stability. UPI has become an important component of India's digital payments ecosystem, allowing individuals and businesses to transfer money electronically through participating banks and payment applications. Any change in the cost of transactions can therefore attract close attention from merchants, payment providers and consumers. The government's decision to permit MDR on transactions above ₹2,000 introduces a new consideration for the digital payments sector, but Malhotra's assessment indicates that the RBI does not currently see the fee as large enough to materially reduce overall UPI usage.

The RBI Governor's comments provide the central bank's early assessment of the potential effect of MDR on UPI activity, while actual payment patterns will determine the longer-term impact of the policy. For now, Malhotra said the RBI had not observed a decline in UPI volumes and did not expect a small fee to produce a major change. At the same time, the central bank will continue monitoring developments across the payments ecosystem as well as credit markets and non-bank lenders. His remarks also underline the RBI's broader view that bank credit growth is likely to remain supportive of economic activity, even as the central bank keeps a close watch on risks to asset quality and the wider financial system.

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